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Expropriating its way to poverty

Australia is often called “the lucky country”. In contrast, I think Argentina deserves to be called “the unlucky country”. The destructive populist Peronist policies of Cristina Elisabet Fernández de Kirchner (standing in for her predecessor former-president husband Néstor Kirchner) are “doing a Venezuela to Argentina”. Argentina is a rich country, so she and her party can continue to pillage for a while. What we don’t understand is why do the people still support her? Here is an update on the latest grab at Economist Free Exchange:

ONE couldn’t ask for a better illustration of the thesis of Daron Acemoglu and James Robinson’s new book “Why Nations Fail” than the decision taken by Argentina’s president, Cristina Fernández, to seize a majority share in the country’s largest oil company, YPF. Our America’s view blog provides analysis:

Taking over YPF offers Ms Fernández both financial and political benefits. She can now use it to conduct the government’s money-losing energy imports and have its minority shareholders suffer 49% of the losses. At a time of high oil prices, she could also use the company’s profits to finance public spending, since Argentina cannot borrow money because it faces punitively high interest rates and legal threats from holders of its defaulted debt. Politically, after failing to convince the rest of the countries at the Summit of the Americas last weekend to support Argentina’s claim to the British-controlled Falkland Islands, the decision provides her a new foreign scapegoat to distract attention from a slowing economy. On the day of the announcement, posters went up around Buenos Aires reading “True sovereignty means taking back what is ours” above the YPF logo.

The medium-term economic costs of the decision could be grim. It eliminates any possibility of securing private investment to develop Argentina’s shale fields, which are extremely expensive to exploit. And it will probably lead to an exodus of experts in the oil industry, accelerating the decline in domestic production.

A country with strong, pluralistic institutions can restrain the grabby hands of the government, reassuring private investors that the fruits of their efforts won’t simply be stolen from them. That, in turn, encourages investment and growth. A country with poor institutions, however, can’t stay the hand of the greedy elite. The government will therefore be inclined to take decisions that enrich or protect its leaders, in the process poisoning the well of future growth.